Richard Coulstock, Director, Head of Dealing at Eastspring Investments, Singapore, examines where multi-asset desks came from, and what the future holds.
To begin a discussion on our current multi-asset world, it is worth recalling just how dealing desks initially began to evolve. There was no miraculous moment of divine creation. Buy-side dealing desks emerged slowly from a primordial soup of regulatory and compliance issues, flung into a hostile world controlled by volcanic fund managers wary of losing control of an important aspect of their investment process. These were primitive times, the trading planet was ruled by dinosaurs. “Paper tickets” and “time stamping machines” were considered cutting edge. Prophets forecasting a future of electronic trading and a glorious world of compliance, risk management and counterparty limits would have been interred for their own safety.
Initially, dealing desks would have consisted of one or two people and perhaps a shared Bloomberg terminal with focus generally on equities and possibly a little foreign exchange. Dealers would have been viewed very much as being no more than a cost centre, adding little or no value to the front office team.
Slowly, attitudes changed, a trading benchmark would have been applied to executions and, over time, desks began to demonstrate that value was added by having dedicated dealers paying full attention to execution quality. The next stage of evolution would be for dealing heads to participate in regular team meetings with investment heads and perhaps present capabilities to existing and potential clients. No longer soupy amoebas, dealers began to progress up the food chain.
Moving on from those early formative days, recent times have seen further changes in the Asian equity trading landscape which have required dealing desks to become increasingly sophisticated. Regulatory changes, competition to established exchanges, algorithmic trading and increased usage of execution analytics and commission sharing agreements have all combined to make Asia a dynamic and challenging trading environment requiring an increased toolkit and skill set for those of us covering this region.
With regards to toolkits, dealing desks will need an advanced EMS (Execution Management System), possibly to complement and enhance the functionality of an OMS (Order Management System). These systems allow traders to execute electronically, access various dark pools and perform both pre- and post-trade analytics with a view to continually seeking to improve execution results. For a dealing desk not to have access to all relevant pools of liquidity is verging on negligent and could be considered a dereliction of duty in terms of trying to achieve “best execution”. But to access those pools properly and to monitor their behaviour, you need the appropriate tools.
When we look at a buy-side desk in Asia now, compared to ten years ago, in evolutionary terms we have gone from inventing the wheel to warp drive in less than a decade.
Changes in the equity world also involve exchanges themselves. New markets are opening up and existing exchanges are looking to connect. The ASEAN Link and the proposed Shanghai-Hong Kong Mutual Market Access scheme are two examples of these developments. Exchanges and regulators are also more aware of the changing landscape as competition increases and innovations such as high frequency trading require close scrutiny.
In addition to the changing equity landscape, further developments are starting to creep into non-equity asset classes. In the foreign exchange world, asset managers are thankfully moving away from models whereby custodians execute all FX trades or FX is treated as an end of day sweep up, an annoyance that has to be dealt with in order to facilitate trading in other asset classes.
There has been an increasing awareness that FX matters. Part of this has been driven by court cases in the US, where custodial FX trades, executed on a standing instruction basis, were found to have been failing in certain respects. Here at Eastspring Investments, we have been progressive in terms of introducing foreign exchange execution measurement into our work processes, measuring both trades executed by ourselves and those in restricted currencies still executed by custodians. While this is a more complex process than in the equity world, largely due to the lack of transparent exchanges, we are now sharing analysis with counterparties and are using results to find ways to improve our processes.
Our fiduciary duty to our clients to attain best execution has seen a drive towards electronic and algorithmic trading with foreign exchange execution analysis now an embedded part of our workflow. The analysis aspect is still work in progress as issues such as benchmarking are more complex than in the equity world. However, it is clear that foreign exchange trading has advanced significantly, will continue to do so and that changes in bond trading from a global perspective have also begun.
If we concentrate on the Asian environment, bond trading is certainly less advanced than in the US or in Europe. There are a number of reasons for that, issues from both the buy- and sell-side. From the sell-side, banks are used to trading bonds in an OTC fashion. Moving to a more competitive, transparent and measurable environment may not be in their economic interests. On the buy-side, unlike in the equity world, dealers are unused to a world of change. In the bond environment we are in the early stages of evolution. Perhaps the first stage has been for many of the larger asset managers, ourselves included, to set up multi-asset trading desks instead of having fixed income managers execute for themselves, or to have dealers as an embedded part of the fund management team.
I believe that separate identity for dealing teams is a crucial stage of development. When we look at the overall landscape we cannot forget regulators and exchanges. They too have their role to play. For the purposes of this article, I shall leave regulators largely aside, except to say that regulatory changes will hopefully push traditional OTC flows onto listed platforms. Transparent, listed trading is crucial in both reducing manual errors and in providing a platform upon which to build execution analystics.
In the exchange world, Eastspring Investments is based in Singapore and we have found our local exchange to be increasingly progressive and engaging. Singapore is Asia’s largest FX trading centre, and SGX today offers both listed FX derivatives and OTC clearing services for FX Forwards. SGX Derivatives Clearing (SGX-DC) is the first Asian clearing house authorised as a Derivatives Clearing Organization (DCO) by the CFTC (U.S. Commodity Futures Trading Commission). In addition, SGX has initiated a thorough study of electronic trading of Asian bonds with a presentation in New York entitled “Are investors becoming more comfortable trading less liquid bonds electronically?”. A conclusion of the SGX is that their research indicates there is strong evidence that electronic trading in Asian bonds and in the Asia region is rapidly growing, albeit from a lower base than in Europe or indeed the US.
Interestingly, The Straits Times recently ran an article calling for a more reliable bond trading market with increased transparency and highlighting issues such as wide spreads and large lot sizes.
It is clear that the bond market is evolving and will continue to do so and this can only be in the interests of both retail and institutional investors. Improved efficiency, tighter pricing, increased transparency and lower overall costs are obviously in the interests of all investors.
As a final point, trading on electronic platforms will make integration of multi asset desks an easier process and more readily allow for cross-asset training of buy-side dealers. The Age Of Dinosaurs will finally be over, buy-side dealers will have completed another stage of evolution.
